Duel of the Discounters : New Competitors Seek Share of Membership Cash-and-Carry Trade

SAN DIEGO — Until late 1985, Price Co. had the Southern California discount membership warehouse market virtually to itself, its home turf untrammeled by the growing ranks of discount chains seeking to copy the Price Club's cash-and-carry operation.

But Price, a $2.6-billion, 27-warehouse company headquartered here, is beginning to face an onslaught of competitors. Last year, half a dozen competing warehouses opened in Southern California, and in 1987, three other chains alone--Costco, Pace and Price Savers--are opening a total of 15 warehouses in the region.

The big expansion plans reflect the chains' confidence that the densely populated Southern California marketplace can support still more of these cash-and-carry (no credit cards) operations. Unlike warehouse stores that specialize in, say, food or home-improvement items, these stores--often 100,000 square feet or larger--carry a gamut of products from tires and mink coats to food and television sets.

"We saw some holes in the market," said James Sinegal, president of 38-store Costco Wholesale Corp. of Seattle, which will open warehouses in Garden Grove in June, Van Nuys in the fall and two other regional locations later this year that he won't disclose. Late last year, Costco opened warehouses in Riverside, City of Industry and Canoga Park.

Some investment analysts, however, worry that the increased competition will result inevitably in a shakeout. With the large sales volume required to bring profits to the bottom line, some of the entrants may not be strong enough to last the two- to three-year period that many warehouses require to establish themselves in a market, said Glenn E. Johnson, a retail analyst at Piper, Jaffray & Hopwood in Minneapolis.

"You are entering a phase here where several players are going head to head. We see margins deteriorating because people are lowering prices to grab a share of the market. As a result, everyone makes less money," Johnson said.

Profit margins are already razor thin, Johnson said, adding that of the 14 or more major warehouse companies, only three are profitable: Price, Costco and Sam's Wholesale Club, a division of Wal-Mart Stores Inc. Stock prices of most publicly traded discount warehouse operations have "dropped dramatically" during the past year, a sign that Wall Street views the intensifying competition with alarm, said Sarah Stack, a retail analyst with Bateman Eichler, Hill Richards Inc. of Los Angeles.

As stock prices have dipped, the number of players in the industry has grown. In 1982, Price Co.'s eight discount warehouses represented the entire industry. But by the end of last year, more than 220 stores operated by 14 chains were open, according to Pace Membership Warehouse Inc. Chairman Henry Haimsohn.

Total warehouses in operation by the end of this year could grow to 300, according to a Merrill Lynch Capital Markets study.

"There's been tremendous growth, and I guess the reason is that people are trying to be first in their market area. But there's going to be some shakeout as well. There are lots of contenders in the field, and only several are making money," said Charles Self, vice president of finance for Bentonville, Ark.-based Wal-Mart, the parent of 52-store Sam's Wholesale Club. For the time being, Sam's is staying away from the Southern California market, he said.

Price Co. overshadows all its competitors with $108 million in annual sales per store. That compares to Pace's $30-million average, Costco's $42 million and Sam's Wholesale average "in the vicinity of $50 million," Self said.

Moving Boldly

"Price's execution is very formidable in terms of high inventory turnover and low gross margins. They pioneered the format and the execution of the format," said Ian Bell, a retail analyst with Merrill Lynch Capital Markets.

Of the three chains challenging Price in Southern California, Pace of Aurora, Colo., is making the boldest move. The first two of seven new membership warehouses planned for 1987 opened April 3 in Woodland Hills and El Monte. Pace will open additional stores in Chino, San Bernardino, Fullerton, San Fernando and Cathedral City later this year, Haimsohn said.

Pace chose Southern California over other regions, including New England, because Price Co. has "conditioned" the Southern California marketplace on membership warehouses.

"People in Southern California are familiar with the concept, and people in New England are not. It takes time to educate the marketplace about the kind of value we offer, and we don't have to suffer that delay in Southern California," Haimsohn said.

Price Savers, a subsidiary of Cincinnati-based Kroger Co., has one store in South Gate and will open warehouses in City of Industry in June, in Stanton and Montclair in September and in Irvine later this year, said Kroger spokesman Jim McIntire.